Saturday, November 3, 2007

Relative status and happiness: Show me the money

Relative Comparisons and Economics: Empirical Evidence is a nice and short review on relative status and comparisons from the FRBSF and the underlying data issues. This anecdote from Robert Rubin's In An Uncertain World is more convincing:

Bob Strauss once captured this dynamic when he said that a lawyer at his firm earning $90,000 a year -- this was some time ago -- and offered a $10,000 raise with the stipulation that a peer next door would get a $20,000 raise would prefer no raise at all to someone on his own level being paid even more. (p. 102)

There are a lot of anecdotes that convince me that people care about their ranking much more than analysis of happiness data or experimental data. I need to remind myself to look into models that assume relative consumption and explore the impacts (aside from those in asset pricing models such as Abel's Asset Prices under Habit Formation and Catching up with the Joneses)

It also sounds like the regression specifications in the literature are similar to those used in estimating peer effects, i.e. the average of some variable for the group in which the individual belongs to is included as a regressor. I recall Manski having a criticism of this approach but I cannot remeber the details.

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